Types of customer loyalty: What drives consumers to keep buying
Research from SAP Emarsys reveals the different kinds of customer loyalty drivers and how they're changing.
Loyalty programs are powerful tools for driving revenue and customer retention. However, their true value lies in their ability to deliver tangible financial results.
By focusing on key performance indicators (KPIs) that directly impact the bottom line, loyalty managers can effectively communicate their program’s impact to the C-suite to win the necessary funding and ongoing support.Aligning customer loyalty initiatives with business goals ensures that your loyalty program meets the mark for strategic objectives, ultimately boosting the organization’s overall success. Here are six loyalty program KPIs that the CFO values:
- Program ROI
- Customer lifetime value (CLTV)
- Customer acquisition cost (CAC)
- Retention rate
- Loyalty currency liability (point liability)
- Discount rate
1. Measure and maximize loyalty program ROI
Program ROI measures the financial return generated by a loyalty program relative to its cost. CFOs need to see a clear financial return on loyalty program investments.
To calculate this effectively, start with the member revenue and subtract the cost of the product, cost of rewards, and loyalty technology expenses. This calculation provides the loyalty contribution over time.
To determine the ROI, divide this profit number by the combined cost of technology and rewards. For example:
ROI = (Loyalty Contribution) / (Cost of Technology + Cost of Rewards)
Alternatively, some companies prefer to focus on incremental revenue. In this approach, they divide the incremental revenue by the cost of rewards and technology:
ROI = (Incremental Revenue) / (Cost of Technology + Cost of Rewards)
By calculating and optimizing program ROI using these methods, companies can ensure their customer loyalty programs are financially sustainable and contribute positively to the bottom line. This straightforward KPI allows for a clear assessment of the effectiveness and efficiency of loyalty initiatives, providing the financial justification that CFOs require.
2. Enhance customer lifetime value
Customer lifetime value (CLTV) is a metric that estimates the total revenue a business can expect from a single customer account throughout the business relationship.
As a core component of successful customer loyalty programs, CLTV offers CFOs a clear financial picture of the long-term value each customer brings. By fostering deeper customer relationships, loyalty programs can significantly increase CLTV.
Loyal customers tend to have longer tenures, spend more, purchase more frequently, and have a higher propensity to try new products or services. More loyal customers are less likely to churn, reducing customer acquisition costs (CAC) and improving profit margins. Plus, loyal happy customers will advocate for your brand with friends and family, further reducing your CAC.
By strategically investing in loyalty initiatives, businesses can directly impact CLTV, optimizing customer lifetime value and driving sustainable growth.
CLTV is a number that can fluctuate. Your loyalty program is a means to track this data. You can then report up to the c-suite the percentage increase the loyalty program is bringing to CLTV.
3. Understand the impact of loyalty programs on CAC
Customer acquisition cost is the cost associated with acquiring a new customer. This KPI can demonstrate how a loyalty program helps save money from marketing acquisition budgets. By optimizing CAC, companies can allocate resources more efficiently and improve the ROI of their marketing efforts.
At a time when CAC is high, a well-designed loyalty program reduces CAC by increasing customer engagement, leading to higher retention and encouraging repeat purchases to improve financial performance.
Additionally, as mentioned above, good loyalty programs drive customer advocacy that can lead to new customers. New customers that come in through referrals cost significantly less than those acquires through traditional marketing channels.
Another plus of this loyalty program KPI: it’s been noted that customers who are referred by those they know will spend 15% more than customers acquired from other channels. Done right, loyalty programs can significantly reduce CAC and increase revenue per individual customer.
4. Improve retention rate through loyalty programs
Retention rate measures the percentage of customers a company retains over a specific period. High retention rates signify customer satisfaction and loyalty, reducing the need for expensive acquisition efforts. CFOs value retention as it directly influences profitability and cost efficiency.
By improving retention rates, companies reduce churn, lower marketing expenses, and boost profitability, making loyalty programs essential.
From the initial website visit to post-purchase support and beyond, loyalty programs should be designed to anticipate and address customer needs. By collecting and analyzing customer data, businesses can tailor offers, recommendations, and communications to individual preferences.
For instance, personalized welcome emails, targeted product suggestions based on purchase history, and timely birthday rewards can foster a sense of connection and loyalty. Between transactions, automated programs can maintain engagement through exclusive content, loyalty tiers, and gamified experiences.
5. Effectively manage points liability
Points liability is another important loyalty program KPI. While high purchase rates often indicate program success and customer satisfaction, they directly contribute to growing points liabilities. As customers accumulate points, companies incur a growing financial obligation that can influence balance sheets, cash flow, and overall financial forecasting.
Organizations must balance the desire to reward loyal customers with the need to manage financial risks. This is why many programs have points expiry or “forced” rewards.
Point liability is usually calculated by taking the number of points earned less the amount of points redeemed, then adding the reward value to the outstanding points. For example, if it takes 100 points to redeem $1 off, then the cost of the point is equal to $0.01. All points earned will have that value. Companies must account for this cost as deferred revenue. They can realize the revenue as points expire or they can apply breakage once they have a few years of point earing/redemption/expiry history.
The best loyalty program starts by taking stock. Evaluate your program’s strengths and weaknesses HERE.
By accurately estimating points liability and optimizing reward structures, businesses can maximize the return on their loyalty program while reducing financial risk. Effective points liability management involves considering factors such as redemption rates, point expiration policies, and the cost of rewards.
Loyalty program managers should work closely with CFOs to develop strategies that incentivize customer engagement without creating excessive financial burdens. By striking this balance, companies can ensure that their loyalty programs drive long-term growth and profitability.
6. Reduce discount rates and drive profitability with loyalty programs
CFOs are under pressure to optimize profit margins while driving revenue growth. Excessive discounting erodes profitability and masks underlying business health. Loyalty programs offer a strategic alternative by fostering deeper customer relationships and reducing reliance on promotions.
By increasing customer perceived value and encouraging full-price purchases, loyalty programs contribute to lower discount rates and improved overall profitability.
This shift from short-term sales tactics to long-term customer relationships strengthens a company’s financial position and improves shareholder value. Loyalty programs enable businesses to build a loyal customer base that is less price-sensitive and more willing to pay a premium for products and services. By reducing the need for discounting, organizations can improve profit margins and allocate resources more effectively towards strategic initiatives that drive long-term growth.
Also, many retail companies negotiate vendor income from brands that are featured in the loyalty promotions to generate a new revenue stream and offset the cost of the points/rewards.
Customer loyalty programs: How brands can create a virtuous circle
What makes customer loyalty programs succeed? Create experiences that customers love by speaking to their heart, soul, and head.
Score support with loyalty program KPIs
Aligning your program with these key KPIs can provide CFOs with the insights they need to support and invest in customer loyalty initiatives.
By focusing on metrics that demonstrate financial impact, loyalty managers can secure buy-in from the C-suite and drive long-term success.
Better.
Faster.
Amazing every time.
A CX that drives loyalty + bottom lines starts HERE.